Denver's Westport Resources Corp. (NYSE: WRC) will vault into the ranks of the nation's 20 largest independent producers when it completes its $922-million purchase of Belco Oil and Gas Corp. (NYSE: BOG) later this summer. The all-stock acquisition will increase Westport's reserves by approximately 726 billion cu. ft. of gas equivalent (Bcfe), or 193%, to an estimated 1.2 trillion cu. ft. equivalent. Production will climb by 93% to 167 million cu. ft. equivalent (MMcfe) per day from the 179 MMcfe per day that Westport reported for first-quarter 2001. Yet the purchase won't place an extraordinary strain on Westport's balance sheet, despite its assumption of approximately $588 million of Belco debt, preferred stock and hedges. The combined company's debt to total capitalization will be approximately 26%, Westport chairman Donald D. Wolf told investors and Wall Street oil analysts in a teleconference. Initial market reaction did not follow the customary pattern. Belco stock closed 40 cents lower at $10.17 per share and Westport climbed 22 cents to $24.75. Wall Street oil analysts' assessments ranged from guarded to enthusiastic approval. Van Levy of CIBC World Markets questioned whether Belco was getting full value for its assets. Belco president Grant Henderson responded that the company also was bringing substantial debt and hedging expenses into the combined entity. "Our rigorous analysis considered total contributions. Belco shareholders do quite well in this transaction," he said. John J. Myers, who follows Belco for Dain Rauscher Wessels, agreed. "We believe that Belco's management did the right thing for shareholders and chose wisely in picking its partner." Myers maintained his Buy-Aggressive rating and $15-per-share price target for Belco because of his strong opinion of Westport's management. He also believes that the combination is strategically attractive. "The anticipated enhancement of trading liquidity, market capitalization and capabilities for attractive cost rationalization offer Belco shareholders continued upside from current price levels," Myers said. Jeffrey W. Robertson, who follows Westport for Lehman Brothers, retained his Strong Buy and $32 target on the stock. "The proposed acquisition appears to be significantly accretive to Westport on both a reserve and cash flow-per-share basis," he indicated. "The combined asset base will contain a large inventory of more than 1,150 drilling locations. In addition, Belco will expose Westport shareholders to more than 500 Bcfe of estimated probable and possible reserves." David C. Bradshaw of Deutsche Bank Alex. Brown conceded that there's intermediate and longer-term appeal as Belco "rolls under the wing of Westport." But he reduced his opinion on Westport from Buy to Market Perform because he believes the transaction has aspects that likely will keep near-term attention away from its substantial benefits. He thinks Westport still can achieve his $30-per-share target. "The appeal of the emerging story is notable. It is a story to which we will, doubtless, return," he said. Belco shareholders will receive 0.4125 share of Westport per share of Belco. The transaction is to be tax-free. Belco's preferred stock will remain outstanding following the merger. Credit Suisse First Boston Corp. advised Westport and Petrie Parkman & Co. advised Belco. This apparently is a classic case of a financially strong, but opportunity-constrained, producer getting together with a competitor that has substantial exploration and development opportunities, but lacks the money to pursue them. "Both companies have a similar strategic philosophy, with a balanced approach between acquisitions, exploitation and exploration," said Wolf, who will chair the combined company. "We also will remain balanced with respect to commodity mix, as our pro forma gas-to-oil ratio will be 52%, based on total reserves. The addition of Belco's production will add significant cash flow that will allow Westport to high-grade and increase its drilling program, while generating excess cash flow to pursue additional property transactions consistent with our business strategy." Westport president Barth Whitman added, "Belco has a history of looking for large reserve bases of 9 million barrels or more. It also has assembled large packages in the Rocky Mountains, where we're already active. This will give us a multiyear exploitation and exploration program to go with our prospects in the Midcontinent, along the Gulf Coast and in the Gulf of Mexico." Westport will continue to direct its Rocky Mountain activity from Denver. Belco's principal operating office in Dallas will become home base for Midcontinent and Gulf Coast activity, which Henderson will manage. And Westport will continue to direct its offshore operations in the Gulf from Houston. Westport plans to apply $75 million of currently available cash to Belco's $150 million of debt under its $200 million revolving line of credit, according to Westport chief financial officer Lon McCain. "We think we'll have a borrowing base that could be as high as $500 million. Our credit history should place us in the high double-B range, giving us strong borrowing capacity," he said. -Nick Snow
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